Not all debt is created equally. Some types of debt are classified as business, and some types of debt are classified as consumer. The differences between these two types of debt can make a tremendous impact on a person’s financial life when things go sideways. To help you gain a stronger understanding of the most common type of debt—consumer debt—we’re going to cover how consumer debt works, along with how to reduce consumer debt if it gets out of hand.
What are the three most common types of consumer debt?
The most common types of consumer debt include credit cards, student loans, and other types of consumer financing like payday and personal loans, which often come at higher interest rates than long-term secured loans like mortgages.
Advantages and Disadvantages of Consumer Debt
Disadvantages of consumer debt aren’t hard to think of. There are interest charges, potential late fees, and the burden of monthly payments always hanging over your head. Not to mention revolving consumer debt that charges you interest on top of interest! These downsides can lead some to needing debt consolidation to escape high payments.
That said, some may argue that consumer debt has advantages (for some people). For example, consumer debt increases consumer spending and production, resulting in growth for the economy. It can also help smooth out meeting needs with spending power.
One example of this is when people borrow earlier in life for things like a college education or a house. These debts are paid down later when earning potential is higher, making it easier to meet essential needs during the lower income years.
Are You Sure It’s Consumer Debt You Have?
Is Your Debt Classified As Business or Consumer?
Classifying what type of debt you have can be a crucial part of financial dealings like bankruptcy cases or debt relief programs. What makes the difference between consumer and business debt? Basically, consumer debt is debt that’s incurred by an individual for primarily personal, family, or household purposes. All other types of debt are considered non-consumer debt.
What you used the money for is the best way to determine the debt type, rather than where you acquired the debt. If the money was used to pay a personal, family or household expense, or to purchase personal, family or household goods, it’s almost certainly a consumer debt.
If the money from the debt was used to pay something else, it could be non-consumer, and therefore, a business debt. That said, if you incurred the debt for a consumer purchase like a laptop, but later used the property in a business, the debt will still be considered a consumer debt.
Examples Of What Classifies As Business Debt Or Consumer Debt
Past Due Taxes
Taxes, whether past due or owed in the future, are generally not considered consumer debts. Instead, courts consider taxes to be a non-consumer debt. This may seem strange, but it’s due to the fact that no one voluntarily takes on tax debt for personal, family, or household purposes.
Some courts count student loans as consumer debt and some do not. This will largely come down to the state you live in, so be sure to first check with an experienced bankruptcy attorney in your area. Any documentation you can collect to show what the student loan was used for may prove helpful, such as tuition and books or housing expenses and food.
Credit Card Debt
If you always carefully separate particular cards for business and personal expenses, it’s far easier to classify which debt is consumer debt. However, if purchases have been mixed, you’ll need to go through your statements to check which individual purchases were for consumer or non-consumer purposes at the time they were made.
For instance, any purchases of business inventory or equipment, along with cash advances deposited into the business account for business expenses aren’t considered consumer debt. Contrast this with daily lunches or gas for your daily commute, which are consumer debts.
Any mortgages on your house are considered consumer debt, while mortgages on a business property like an office building or storage facility are considered business debts. Even if you have a mortgage on a property that you first resided in when you obtained the mortgage loan, but now own as a rental property, the debt is still classified as consumer. Only if the mortgage on the property you purchased was an investment property to rent out will it be considered a business debt.
If you get a loan to buy a truck for use only at your construction business, this would be considered a business debt. Comparatively, a loan on a family car that you sometimes make business sales calls in would be classified as a consumer debt.
Medical expenses are often considered non-consumer debts and instead qualify as business debts. This is similar in reasoning to tax debts, because a person doesn’t voluntarily “incur” medical debt. One exception is when a medical expense is for elective cosmetic surgery, which would then be classified as a consumer debt.
Domestic Support Obligations
Courts generally consider these obligations to be consumer debts.
Despite the name, personal guarantees on business debts are not classified as consumer debt—they are still business debts.
If legal fees are incurred for family or household purposes like divorce, child custody suits, and spousal support, they are likely to be considered consumer debts. When legal fees are incurred in connection with business dealings, they are classified as non-consumer or business debts.
As with medical and tax debts, accident liability debts are considered to be business debts.
Need Relief From Consumer Debt?
If you’re unsure what type of debt relief is available for your consumer debt, Alleviate Financial has debt relief experts ready and waiting to help you determine what assistance you may qualify for. Contact one of our debt relief specialists today and alleviate your stress by taking control of your financial life.